In the 1980s and ’90s, in order to “be the house,” Donald Trump was willing to take big gambles.
Usually, that meant using other people’s money, although bankers and creditors learned the hard way that businessman Trump’s wagers rarely worked out for his backers. For instance, a 1995 investor in the Trump Hotels & Casino Resorts IPO ended 2004 with 10 cents for every dollar invested. The company went into Chapter 11 — in all, the Donald’s business were forced to declare bankruptcy six times.
Now as president of the United States, Trump has been handed his biggest line of credit and is playing cards on a global stage. In order to remain in the White House, his gambit to renegotiate trade agreements by risking all-out trade wars with China, Canada, Mexico and the European Union may be Trump’s biggest gamble of all.
[Read: Investors Have Options in a Trade War.]
The tariffs: What they are and who they hurt. On Tuesday, the White House announced a 25 percent tariff on $50 billion of Chinese goods, and vowed to soon restrict Chinese investment in the U.S. as well.
On Thursday, the U.S. did something even more inexplicable: it announced 25 percent steel tariffs and 10 percent aluminum tariffs on imports from the European Union, Canada and Mexico. These are three of America’s greatest allies.
The straightforward takeaway from this move, in a vacuum, is that U.S. steel and aluminum producers will benefit, since the price of these metals sold by foreign competitors will soar. Domestic producers should easily gain U.S. market share and might even be able to raise prices while doing it.
But by diminishing competition in these industries, the move hurts any industry using steel and aluminum as input costs. Turns out that ripple effect is quite large, hurting U.S. automakers like Ford Motor Co. (ticker: F) and General Motors Co. ( GM), aerospace manufacturers like Boeing Co. ( BA) and Lockheed Martin Corp. ( LMT), and appliance makers like Whirlpool Corp. ( WHR).
“But if there is no tariff on autos being brought into the U.S., then U.S. autos become more expensive but imported ones don’t,” says Kyle J. Anderson, economist at the Kelley School of Business at Indiana University.
Soda cans and beer cans are also made of aluminum; construction costs, pipeline development, and capital expenditures in the utilities industry will likely rise. But even this long list of industries doesn’t totally do justice to who will feel economic pain.
“Any U.S. company that is part of a global value chain is impacted,” says Mohan Tatikonda, professor of operations management at Indiana University Kelley School of Business.
“It needn’t itself directly source from or supply to other countries. All that matters is that just one of its suppliers’ suppliers, or one of its customers’ customers, be abroad. Or that one of its suppliers’ suppliers, or one of its customers’ customers has been subject to retaliatory tariffs,” Tatikonda says.
Industries have to either eat the higher costs or pass them on to the consumer. “Ultimately, the harm is most felt by consumers,” Anderson says.
For investors, the nine-plus year bull market could ultimately be in jeopardy, especially if these actions escalate into an all-out trade war. Trump, who has previously sung his own praises for a soaring stock market, would be responsible for a trade war-fueled bear market.
The targets of these tariffs have already indicated retaliatory actions; the EU vowed to impose taxes on everything from U.S. agriculture, steel and industrial products to Harley-Davidson ( HOG) motorcycles, Levi jeans, cigarettes and peanut butter.
Canada promised tariffs on $16 billion of U.S. goods, and Mexico announced duties on American goods ranging from steel to pork.
“If these tariffs are fully enacted and remain in place, then this will almost certainly start a trade war. The only question is how big the trade war is likely to be, and how quickly it will escalate,” Anderson says.
A nonsensical risk-reward. Arguably the largest damage resulting from these hostile U.S. actions is something that’s already happened: a degradation of relations with some of our most valuable allies. That is an intangible but certain cost, already incurred, before any reward possible on the other end.
America has also hurt its diplomatic standing with China, and something else quite valuable, and indeed priceless: the value of its word. China was taken aback by the annunciation of 25 percent tariffs on $50 billion worth of its goods because the U.S. had agreed to suspend them in exchange for China narrowing the trade gap by purchasing more U.S. exports.
Diplomatic ties, strong allies, trust — these are a high price of admission. In addition, the risk of economic harm — either from these policies themselves or from an extended, severe trade war — are being thrown in the pot as well. What is Trump trying to gain?
On the face of it, tariffs against China are framed as a sort of response to “discriminatory and burdensome trade practices.” Specifically, the theft of American intellectual property, especially industrial and technological IP, is excessive in China.
This could be the main goal. There are also other possible motivations; Trump recently implied China may have twisted North Korea’s arm and influenced it to back off of denuclearization, causing the U.S. to cancel the nuclear summit, at least temporarily.
From the White House’s perspective, Trump has created leverage, and he wants to extract a toll. But whatever the toll is, it will have one characteristic for Trump himself: something he can tout to the American public, and most importantly to his base.
[Read: Boeing May Be the First Casualty of a Trade War.]
A successful North Korean summit, IP concessions, or anything else China gives up could easily be flaunted as a victory. But Trump may view this as a win-win: if China doesn’t cave and instead engages in a trade war, Trump can fully execute on his protectionist campaign rhetoric in the name of creating U.S. jobs, all the while vilifying China.
In reality, there’s the inconvenient fact that protectionism has a poor record of job creation and economic stimulation. The Smoot-Hawley Tariff Act in 1930 is commonly credited with accelerating the Great Depression.
“Simply put, any ‘reward’ to the U.S. is very short term and comes with inordinately high long-term costs: loss of credibility, untrustworthiness as an ally, and a fraying of the multilateral trade system that brings nations together in a larger free-market system,” says David Lei, associate professor of strategy at the Cox School of Business at Southern Methodist University.
Traditional economic costs of protectionism also apply, Lei says, including “massive hits to U.S. firms in terms of higher costs, lost market opportunities for export to promising and fast-rising markets,” and worse-off U.S. consumers and shareholders.
With China, Trump is risking a trade war and has already shattered the value of an international agreement with the U.S. Yet, there are possible payoffs.
The decision to enact tariffs on our closest allies, however? There’s little to be gained there, despite the heavy upfront cost of eroding friendships.
The biggest gambles a human can make — with others’ capital. To his credit, Trump promised to be unpredictable on the campaign trail. And that’s precisely what voters are getting.
There’s one pattern of behavior that has stayed remarkably consistent over the president’s life, however: taking excessive risks with OPM — or in this case, diplomatic equity, citizens’ well-being, and centuries of American reliability — in hopes of furthering his own goals.
In less than 18 months on the job, the president first played fast and loose with the threat of nuclear war, and now casually wagers the economy, along with America’s international report.
[See: The 10 Most Valuable Auto Companies in the World.]
Some things shouldn’t be gambled with. Hopefully U.S. citizens, Trump’s current creditors and shareholders, fare better than those in the past.
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Trump’s Enormous Trade Gambit: Is the Risk Worth It? originally appeared on usnews.com
